How to use Definitions in an agreement

Published:24 Jan 2018

There could be terms which are used many times throughout an agreement.

It starts from the parties to the agreement itself. For example, instead of mentioning Mr. Muralikrishnan Ramaswamy Balasundaram Mahalingam (I have no idea if there is a gentleman with this name, no offence, just an example) or XYZ Steel Manufacturing Corporation Limited or LMN International Trading Services India LLP, you could merely use MRBM, XYZ or LMN. Brevity makes it much easier to read, understand and correlate.

Similarly, definitions tend to make interpretation and reading of an agreement simpler and concise and reduce ambiguity. A defined term used anywhere in the agreement refers to the defined person or entity or process.

Definitions breed consistency of reference throughout the agreement. The reader is sure of meaning of a defined term, once she understands it.

For example, if XYZ Steel Manufacturing Corporation is defined as “the Company” in the definition clause, wherever the term the Company is used, it refers to XYZ Steel Manufacturing Corporation and no other company. Similarly, a person, condition or process could also be defined.

If, however, the defined term is used carelessly in the agreement, it confuses the reader and defeats the very purpose for which the term was defined.

Some useful tips:

Capitalise first letter

Unless there is a strong reason for not doing so, first letter of a defined term should be capital. For example, Company, Target, Licensee, Landlord, Supplier, Distributor and so on.

Capitalise all words

If the definition consists of several words, all words should be capitalised except for joining words (or, and, on, in, of, for, by, with, as, at, but, except, under, over, beside, etc.). Some examples could be: Articles of Association, Terms of Engagement, Power of Attorney, Terms and Conditions, Managing Director, Return on Investment, Annual General Meeting, Government of India.

No all capitals

The definition should not be in all capitals, as much as possible. However, where the defined term is in abbreviation of, say the name of an individual (Bhumesh Verma defined as BV), a company (XYZ India Private Limited defined as XIPL), institution (All India Institute of Medical Sciences defined as AIIMS), authority (Government of India defined as GOI), a currency (United States Dollars defined as USD) or a term (Statement of Purpose defined as SOP, Letter of Intent defined as LOI), capital letters may be used in a definition.

Other references

As a general rule and practice, any reference to Article, Clause, Section, Exhibit, Annexure, etc. in the agreement refers to the respective article, section, exhibit, annexure, etc. of that agreement only. Therefore, if a reference is to be made to an article, clause, annexure, etc. of any other document, it should be referred to with a term starting with a small letter and not a capital letter.

Define at one place

It is better to provide all definitions in an agreement at one place. Otherwise, some terms may be defined in description of the parties, some in recitals, some in definition section, some in respective clauses, some in annexures and so on. A reader, therefore, will always be surprised or shocked to find some definition or the other while going through the agreement and he will be at sea to find the relevant definition.

If a defined term is to be used multiple times in one clause only, an exception can be made to define that term in the concerned clause, so that the reader doesn’t have to go to the definition section and is done with the definition once the relevant clause is over.

Use a defined term only after definition

A defined term should preferably not be used before its definition, as much as possible. Instead of saying “the Company as defined in Article _____ ”, first a definition of the Company should be incorporated in the agreement. This gives the reader an idea of the defined term before he reaches the operative clauses where the defined term has been used.

Else, the reader is left to look out for the Article defining the term, and it may turn out that the referred article was renumbered or deleted while negotiating the agreement in several rounds.

Stay with the definition

Once you have defined a term, stick to it throughout the agreement.

For example, you have defined the Board to be the Board of Directors of XYZ India Private Limited and XYZ India Private Limited has been defined as the Company.

Now, wherever in the agreement, you wish to refer to the Board of Directors of XYZ India Private Limited, just write “Board”. Do not write “Board of Directors”, “Board of Directors of the Company” or “Board of Directors of XYZ India Private Limited”. Use of multiple terms for the same person, entity or term creates confusion and irritation.

Define only if you use the term

Do not define a term unless you use it in the agreement. I have seen agreements with many definitions which aren’t used anywhere in the body of an agreement.

This can happen when you take out a precedent and start using it without caring whether all the definitions mentioned therein are needed.

This can also happen if the agreement goes several rounds of negotiation and certain clauses (which may have contained the defined term) are deleted by the end of it.

Therefore, while finalising an agreement, do take care to check whether all the defined terms are required. If a term is not used anywhere, delete the definition.

Define only if you use the term more than once

Do not define a term unless you use it more than once in the agreement. Unless the term is being used time and again, there is no point defining it. The reader will observe and understand the term in the relevant clause only and she isn’t required to remember the defined term elsewhere in the agreement.

Don’t define simple terms

Do not define terms which are commonly understood. Else, you have to define each word in the agreement!

Definitions in a Series of documents

If several transactional documents are tied with each other and are to be read together, may terms would have the same meaning in all such documents. In such a scenario, you need not define these terms separately in each agreement.

Define the terms in one major agreement and the other agreement may have a statement to the effect that the defined terms will have the same meaning as in the aforesaid major agreement.

Define well and define only once

Your definitions should be very clear and make it easy for the parties and readers to quickly understand as to what a defined word means without having to go to the definitions portion time and again.

Further, you should try to define a person / entity / term only once in an agreement. Having multiple definitions for same person / entity will confuse the parties.

A simple example.

Ms. A is the majority shareholder of the Company XYZ Private Limited. Ms. B also happens to be the Managing Director and Chief Executive Officer of the said company. She is the authorised signatory in respect of the bank accounts of the company and represents the company before all statutory authority.

Ms. A agrees to sell her entire shareholding in XYZ Private Limited to Mr. B.

To effect this, the parties will execute a Share Purchase Agreement. The parties also agree that along with the sale of her shares in the company X, Ms. A will also resign as a director of the company. Once she resigns from directorship, she will cease to be a Managing Director. She will also resign from the Chief Executive Officer position as well. Ms. A will also cease to be authorised signatory on behalf of the company vis a vis, the banks, government authorities, etc.

To incorporate all the aforesaid provisions in the Share Purchase Agreement, an over-zealous draftsman could define Ms. A as the Seller, the Old / Outgoing Director, the Old / Outgoing Managing Director, the Old authorised Signatory and similarly, Mr. B can be defined as the Buyer, New / Incoming Director, the New / Incoming Managing Director, the New / Incoming Authorised Signatory, and so on. I have actually seen this happen in some of the drafts.

This is an avoidable situation.

One may define the parties by their names (or abbreviations thereof) only if they are wearing multiple hats in an agreement, as in the case of the example cited above.

It makes things so simple and easy to understand.

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About the author:

Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in "The A-List - India's Top 100 Lawyers" by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at bhumesh.verma@corpcommlegal.com.

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